Please note that the following document, although believed to be correct at the time of issue, may not represent the current position of the CRA.
Prenez note que ce document, bien qu'exact au moment émis, peut ne pas représenter la position actuelle de l'ARC.
Please note that the following document, although believed to be correct at the time of issue, may not represent the current position of the CCRA.
Prenez note que ce document, bien qu'exact au moment émis, peut ne pas représenter la position actuelle de l'ADRC.
Principal Issues: Would the superficial loss rules deny capital loss treatment for an index-based investor who realizes a loss on a mutual fund and immediately reinvests in an unrelated exchange traded fund that reflects the same market.
Position: Question of fact whether properties are identical - general comments given.
Reasons: Question of fact
Cornelis Rystenbil, CGA
November 22, 2001
Re: Identical Properties - Index-Based Investor
This is in reply to your letter of April 18, 2001, in which you requested our views on whether the superficial loss rules found in paragraph 40(2)(g) of the Income Tax Act (the "Act") would deny capital loss treatment for an index-based investor who may realize losses on mutual fund units.
Written confirmation of the tax implications inherent in particular transactions is given by this directorate only where the transactions are proposed and are the subject matter of an advance ruling request submitted in the manner set out in Information Circular 70-6R4, dated January 29, 2001. Accordingly, should an investor have concerns that the superficial loss rules may apply to a proposed transaction, the investor can request an advance ruling. If the concerns relate to transactions that have already been completed, we would suggest that the investor submit the enquiry to his or her local Tax Services Office, along with all relevant documentation, for review. However, we are prepared to offer the following general comments.
Section 54 of the Act defines the expression "superficial loss" for the purpose of, inter alia, section 40 of the Act. It refers to the acquisition by specified persons, within a certain period, of the same or identical property. As you know, there are currently a large number of different investment instruments being offered by the financial industry sector and new ones are being developed on an ongoing basis. As a result, in this type of an environment, the determination of whether investment instruments are identical properties requires a review of all the facts of each particular situation which would include a review of the legal structure of the investment entity, the composition of its assets, risk factors, rights of investors and any relevant restrictions. Please note that it is also a question of fact whether an investor incurred a loss on account of capital or income.
Nonetheless, subject to an analysis of all the relevant facts, in our view, a TSE 300 Index Fund, for example, would generally not be considered identical to a TSE 60 Index Fund. Whether any other investment instruments are identical properties is a question of fact as discussed above. However, as indicated in paragraph 1 of Interpretation Bulletin IT-387R2, Meaning of "Identical Properties", it is our view that " 'Identical properties...are properties which are the same in all material respects, so that a prospective buyer would not have a preference for one as opposed to another." Accordingly, an investment in a TSE 300 index-based mutual fund of a financial institution would, in our view, generally be considered identical to an investment in a TSE 300 index-based mutual fund of another financial institution.
We trust that these comments will be of assistance.
Milled Azzi, CA
Business and Partnerships Division
Income Tax Rulings Directorate
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